The measurement of fiscal behavior in some European countries: Panel data perspective

Abstract

This paper tests for budget balance of 12 European countries over the period 1999:1-2013:2 by the Sequential Panel Selection Method (SPSM) developed by Chortareas and Kapetanios (2009) using the Panel KSS test with a Fourier function. This article analyses both Kapetanios et al. (2003, hereafter, KSS) without Fourier and KSS with Fourier function. SPSM method tests for unit root that jointly consider structural breaks and nonlinear adjustment. It is applied to the data on 12 European countries and we classify the whole panel into a group of stationary and nonstationary series. In doing so, we can clearly determine which series in the panel are stationary process. We reported the results of the Panel KSS test with a Fourier function and found that the budget balance in 7 countries are stationary and this result is in accord with intertemporal budget constraint. Other hand, budget balance in five countries, namely Finland, United Kingdom, Sweden, Portugal and Latvia has in violation of their intertemporal budget constraint.

Keywords

• Fiscal policy
• budget balance
• Panel KSS unit root tests
• Fourier function